Term 3, 2017-18

Corporate Finance I (CFI1)

Instructor (Sessions 1-5): Prachi Deuskar
Office Hours: Thursday, 3 pm 4 pm or by appointment
Email: Prachi_Deuskar@isb.edu

Instructor (Sessions 6-10): N. K. Chidambaran

Office Hours: 3pm-4pm on all class days and by appointment
Email: Chidambaran_NK@isb.edu

I. COURSE OBJECTIVES AND C ONTENTS

Corporate Finance I is a core course that addresses financial decisions relevant to
managers of corporations. Classes 1-5, to be taught by Professor Prachi Deuskar,
develop the basic tools and apply them to value the assets side of a firms balance
sheet. Classes 6-10, to be taught by Professor N. K. Chidambaran, discuss financing
issues, or the liability side of a firms balance sheet. Our focus will be on the
analytic tools and methods of modern finance rather than institutional issues. There
will be lectures and cases. The case classes may have a short theory-type lecture either
before or after discussing the case.

II. LEARNING GOALS

The course will focus on two primary goals--- Critical and Integrative thinking and
Interpersonal Awareness and Working in Teams. These goals, among others, have been
adopted by ISB (and submitted to AACSB) in teaching of all core courses. In meeting
these goals we will use various pedagogieslectures, homework, cases and
MyFinanceLab. Your performance in achieving these goals will be assessed by three
specific items: individual homework, group cases and individual exams. Each of these is
discussed in greater detail later.

III. TEXTBOOK AND COURSE MATERIALS

Jonathan Berk and Peter DeMarzo, Financial Management, Global Edition, 3rd
Edition, Pearson, 2016 (henceforth referred to as BD), plus MyFinanceLab Student
Access kit.
We will extensively use the myfinancelab tool in this course.
This tool is an excellent resource for practicing end of chapter problems.
Course packet consisting of cases.
Slides for classes to be posted on the course LMS site.

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IV. GRADING
Individual Homework:
Four homework assignments will be assigned during the course. These must be
completed and submitted online before 8 am on the day specified by the instructors on
day 1 of the course. The course homework is based on the online practice tool in the
MyFinanceLab. A score of 80% or more on a homework will earn you full credit
for the homework and anything less than 80% will earn proportionate credit. (Thus,
if MyFinanceLab scores you at 40% for a homework, your actual grade for the
homework for the purposes of this class will be 40/80 = 50% and so on).

WarningWarningWarning WarningWarningWarningWarningWarning- Warning

Students concerned with only grades may be tempted to attempt just enough problems so
they get 100% on homework. This is a fine strategy for maximizing homework points
with minimum effort. However, be aware that learning is most effective when you
attempt all the questions. Moreover, exam questions are drawn from all parts of the class
including material that you may choose to not attempt.

Group Case Write ups:

Cases should be submitted as group work. Hard copies ONLY. Please do not attempt to
have the AAs print out your soft copies for you. It is the groups responsibility to submit
the hard copies, which will be graded. A case write up that does not follow the length or
content guidelines below will get a score of zero. No exceptions

Exams: There will be a mid-term exam and a final exam. More details will be provided
in due course.

OVERALL GRADE
Homework Assignments 20%
Case Analyses: 15%
Mid-term exam 25% or 40%
Final exam 40% or 25%

Your total grade will weigh the exam in which you did better more heavily. In other
words, if you did better in your final exam, the final exam will have 40% weight and the
mid-term will have 25% weight. If you did better in your mid-term exam, the weights
will be reversed.

Total Course Score = Homework (20%) + Cases (15%)

+ Max {Midterm, Final}*40%+ Min{Midterm, Final}*25%

Please note that honor code #2N-A (discussions strictly within group), is
applicable for case submissions and honor code #4N (no consultations or outside
material) is applicable for Homework and Exams for this course.

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V. CASE SUBMISSIONS
Cases should be submitted as group work. Hard copies ONLY. Please do not attempt
to have the AAs print out your soft copies for you. It is the groups responsibility to
print out the copies and submit the hard copies, which will be graded.

Case Write Up Guidelines

Submit case write ups for all cases listed in the outline.
A case write up that does not follow the length or content guidelines below will get
a score of zero. No exceptions.
Two pages of text or less plus any supporting exhibits, written in minimum 11
point font with adequate margins.
Write the report as a professional consulting assignment presented to a client.
Do not write it as a set of answers to case questions. Doing so will result in a zero
grade.
Do not use exhibits to park what does not fit in the text (e.g., a SWOT
analysis). Exhibits should contain only peripheral material or computations to
support the main analysis. The reader should be able to assess your analysis
without reading the exhibits.
Format exhibits well and do not submit exhibits that are not referenced in the text.

Grading
All group members will receive the same grade for a case
All group members must individually be prepared to discuss the case in class.

Discussions of Cases
You are not allowed to discuss cases with students outside your group until all
sections have turned in their case assignments. Any violation will be treated as a
violation of the ISB honor code.

VI. REVIEW FILMS

Brevity, a venture by ISB alumni, has developed films capturing key concepts in
dramatized contexts. The team has worked closely with the faculty. Each film is about
20-30 minutes with interspersed concept checkers and questions that will help you review
what we discuss in class. Review films are listed following the relevant sessions. Brevity
will send each of you log in details to their platform where you will be able to view the
films. With these films, the aim is to showcase work-place applications of concepts learnt
and provide real-world intricacies that go beyond just finance concepts in a condensed
and engaging medium.

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 VII. LMS

We will use the course management system LMS as a course aid. You should refer to
LMS for announcements, course information and supplementary course material. The
Academic Associates will be able to help you with any problems in accessing the LMS.

VIII. ATTENDANCE
Learning is an interactive process. ISB students are admitted partly based on the
experiences they bring to the learning community and what they can add to class
discussions. Therefore attendance is an important aspect of studying here.

The ISB expects students to attend all class sessions in every module. However, if due to
completely unavoidable reasons a student is forced to miss a class session, as per the ISB
attendance policy, the following rules will apply:

If a student misses three sessions in any course, s/he will obtain a letter grade lower than
that awarded by the faculty for that course. With four sessions missed, the student will
receive a letter grade that is two levels lower, and if a student misses 5 sessions or more,
the student will receive an F grade for that course.

IX. CODING SCHEME FOR ALL COURSE WORK

What kinds of collaborative activities are allowed? What material can be referred to?1
References/ Can I discuss general Can I discuss specific Can I refer Can I refer to the
Coding concepts and ideas issues associated with to external case-study solutions
Scheme relevant to the the assignment with material?2 or problem set
assignment with others? others? solutions?
4N N N N N
3N- a Y N N N
3N-b N N Y N
2N-a Y Y N N
2N-b Y N Y N
2N-c N N Y Y
1N Y Y Y N
0N Y Y Y Y

As a general rule:
Students are responsible for submitting original work that reflects their own effort and
interpretation. Remember that any submission should be your own work and should
not be copied in part or verbatim from any other source whether external or internal.

1
Any referencing needs to be accompanied with appropriate citations
2
A non-exhaustive list includes journal articles, news items, databases, industry reports, open courseware

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 An honour code violation is an honour code violation. A violation under coding
scheme 0N is not less severe than others. A 0N coding scheme submission is judged
against a 0N coding scheme, and a 4N coding scheme submission is judged against a
4N coding scheme; therefore, any honour code violation is equally severe irrespective
of the coding scheme of the submission.
Students can discuss cases and assignments with the course instructor and the
Academic Associate for the course.
Required and recommended textbooks for the course and the course pack can be used
to answer any individual or group assignment.
Although not all submissions may be subject to academic plagiarism checker (e.g.
turn-it-in), in retrospect, if the Honour Code committee feels the need, any of the
previous submissions of an individual or a group can be subjected to turn-it-in or any
other academic plagiarism checker technology.
When in doubt, the student should contact the instructor for clarifications.

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 Outline for Sessions 1-5
INSTRUCTOR: PRACHI DEUSKAR

SESSION-WISE TOPICS/READINGS

Session Topic Date/ References Homewor

Case k
1 Introduction to corporate finance July 17/18 Readings: None
The corporation BD,
Financial markets No case Chapters 1
Financial decisions made by and 4
corporations
The NPV criterion
NPV formulas, annuities, growing
perpetuities
2 Project valuation July 19/20 Readings: None
The definition of free cash flow BD, Chapter
Estimating free cash flow from No case 8.1-8.4
accounting statements
Projecting future free cash flows
Putting it together: NPV
3 Cost of capital 1: Systematic risk July 24/25 Readings: HW #1;
Risk in financial markets BD, Chapter due on
Flavors of risk: idiosyncratic and Ocean 10 July 31,
systematic risk Carriers 8-30 am
Beta as a measure of systematic risk
Capital markets and the pricing of
beta risk
4 Cost of capital 2: Estimating beta July 26/27 Readings: None
Beta from historical data BD, Chapter
Beta from comparable firms 12
o Un-levering levered betas Review
Weighted average cost of capital film:
Bakeology 1
5 More on capital budgeting July 31 / Readings: HW#2 due
Internal rate of return and its pitfalls Aug 1 BD, on Aug. 5,
Payback method and its pitfalls Chapters 7, 8-30 am
NPV in practice: dealing with Midland 8.5
uncertainties and stress tests. Energy Review
Resources film: Paper
Factory
Conundrum

CASE LIST FOR CLASSES 1-5

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1. Ocean Carriers
2. Midland Energy Resources

KEY DATES
Date Date Deliverable Grade availability
July 24, 8 am Ocean Carriers (group case write up) Aug 2
July 31, 8 am Homework Assignment 1 Aug 2
July 31, 8 am Midland Energy Resources (group case write up) Aug 8
August 3, 8 am Homework Assignment 2 Aug 3
August 4 or 5 Midterm Exam

Suggested Case Questions

Please use these questions as guidelines for preparation. Do not write your case analyses as
a response to the questions below: doing so will result in a zero grade for the write up.

OCEAN CARRIERS
Ocean Carriers uses a 9% discount rate.
1. Do you expect daily spot hire rates to increase or decrease next year?
2. What factors drive average daily hire rates?
3. How would you characterize the long-term prospects of the capesize dry bulk industry?
4. Should Ms Linn purchase the $39M capesize? Make 2 different assumptions. First,
assume that Ocean Carriers is a U.S. firm subject to 35% taxation. Second, assume that
Ocean Carriers is located in Hong Kong, where owners of Hong Kong ships are not
required to pay any tax on profits made overseas and are also exempted from paying any
tax on profit made on cargo uplifted from Hong Kong.
5. What do you think of the companys policy of not operating ships over 15 years old?
MIDLAND ENERGY RESOURCES
1. How are Mortensens estimates of Midlands cost of capital used? How, if at all, should
these anticipated uses affect the calculations?
2. Calculate Midlands corporate WACC. Be prepared to defend your specific assumptions
about the various inputs to the calculations.
3. Should Midland use a single corporate hurdle rate for evaluating investment
opportunities in all of its divisions? Why or why not?
4. Compute a separate cost of capital for the E&P and Marketing & Refining divisions.
What causes them to differ from one another?
5. How would you compute a cost of capital for the Petrochemical division?

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 Outline for Sessions 6-10
INSTRUCTOR: N. K. CHIDAMBARAN
SESSION-WISE TOPICS/READINGS [Note: Aug 11 is make-up day for Aug 15]

Session Topic Date/ References Homework

Case
6 Financing the firm 1: Perfect markets Aug 02/03 Readings: None
Capital structure irrelevance in BD, Chapter
perfect market No case 14
Leverage, arbitrage, and firm value
The cost of capital in perfect markets Review
Levered and unlevered betas film:
revisited Bakeology 2
Capital structure fallacies: dilution,
equity issues, EPS, and ROE
fallacies
7 Financing the firm 2: Taxes Aug 07/08 Readings: None
The interest tax deduction and the BD, Chapter
case for high leverage No case 15
Valuing the interest tax shield (omit 15.4)
Executing recapitalization to capture
interest tax shields
8 Project valuation for levered firm 1 Aug 09/10 BD, Chapter HW #3;
Project versus company costs of American 18, #18.2 due on
capital Chemical Aug. 16,
WACC method of valuation 8 am
9 Project valuation for levered firms 2 Aug 11/14 BD, Chapter None
The APV method of project 18, #18.3
valuation with constant debt Sealed
The CCF method of project valuation Air
10 Financing the firm 3: Limits to leverage Aug 16/17 BD, Chapter HW#4 due
Bankruptcy costs 16 on Aug. 19,
Personal taxes Sealed 8 am
Debt overhang and under investment Air (cont)
Asset substitution and excessive risk-
taking
Debt hits back: perks, excess free
cash flow, pecking order.

CASE LIST FOR CLASSES 6-10

1. American Chemical Corporation
2. Sealed Airs Leveraged Recapitalization

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KEY DATES

Date Date Deliverable Grade availability

August 09, 8 am American Chem Corp (group case write up) Aug 18
August 16, 8 am Homework Assignment 3 Aug 18
August 16, 8 am Sealed Air (group case write up) Aug 20
August 19, 8 am Homework Assignment 4 Aug 20
August 21 (or 22) Final Exam

Suggested Case Questions

Please use these questions as guidelines for preparation. Do not write your case analyses as a
response to the questions below: doing so will result in a zero grade for the write up.

AMERICAN CHEMICAL CORPORATION

1. Estimate the cost of equity appropriate for the evaluation of the incremental cash
flows associated with the Collinsville investment. Estimate the weighted average cost
of capital appropriate for discounting the Collinsville plants incremental cash flows.
2. Project the incremental cash flows associated with the acquisition of the Collinsville
plant without the laminate technology and estimate the acquisitions net present
value. Project the incremental cash flows associated with the 1980 investment in
laminate technology and estimate the investments net present value.
3. Is the Collinsville proposal attractive on economic grounds?
4. Assess the strategic issues associated with the proposal. Is Collinsville attractive on
strategic grounds?
5. As CEO of Dixon Corporation, would you approve the acquisition of the Collinsville
plant at the price and on the terms proposed? Why, or why not? What alternatives, if
any, would you suggest?

SEALED AIR

1. Why did Sealed Air undertake the recapitalization? Who benefits the most from the
recap?
2. Where did the gain in value in the recap announcement come from?
3. Is the pursuit of "WCM" consistent with a recap?
4. Why were the firm's priorities and incentives changed after the recap?
5. Why were the firm's investor's different after the recap?
6. What do you think of the capital expenditure constraint after the recap? Do you think
it is necessarily binding?
7. Is high leverage a good idea in general? What kinds of companies would benefit the
most from high leverage?